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Why Universal Music Sued Its Insurer Over a $14.4 Million Payment to Musicians (Analysis)

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Chet Baker in 1961

The record label allegedly held back royalties from song artists and in a settlement UMG paid out, but now it wants reimbursement.

We wonder if anybody will ever remake Double Indemnity, except this time featuring a record label that purchases an insurance policy that pays off handsomely should a songwriter be murdered on royalty issues.

This one's got potential. Check out a lawsuit filed this week by Universal Music Group against one of its insurers.

On Tuesday, in Los Angeles Superior Court, UMG sued the National Union Fire Insurance Company of Pittsburgh for failing to reimburse $15 million needed to settle a class action lawsuit led by jazz great Chet Baker.

That class action was filed in 2008 in Canada and alleged that several record labels had participated in a scheme that was nicknamed "Exploit now, pay later."

Until the late 1980s under Canadian law, when record labels put out compilation albums, they didn't need to get the permission of artists. Instead, they merely needed to pay compulsory mechanical royalties. Then, the country changed its law to require the permission of song artists, but according to the 2008 lawsuit, the labels continued to put out compilation albums without getting approval. Not only did they not get permission, but the record labels allegedly held back royalties. Instead, the labels marked songs onto a "pending list" for later approval and payment.

According to the class action complaint, the defendant record labels estimated that monies earmarked for copyright holders on the Pending Lists was $50 million. So record labels owed $50 million, but the plaintiffs brought charges of copyright infringement, which meant potential statutory damages amounting to more than 100 times that amount. The lawsuit was deemed at the time to be Canada's largest ever copyright infringement case,

This past January, record labels settled the case and handed over $45 million. In other words, about the same amount of money that labels were said to have acknowledged owing in the first place. At the time of the settlement, the attorney for the plaintiffs commended the labels for resolving the matter.

Now, it gets interesting.

This week, UMG turned to its insurance company for reimbursement of its portion of the settlement ($14.4 million) plus attorney's fees and legal costs (about $1 million).

UMG says it first attempted to get National Union to pay up in 2010, when the settlement demand was first made, but the insurance carrier refused. Not wishing to face potential billions of dollars in damages, UMG decided to go along with other record companies and settle. UMG now says that National Union's failure to pay up constitutes a breach of its insurance policy to indemnify copyright claims.

In other words, UMG put out albums without artist permission, held back royalties from these artists, and then finally paid out when faced with a much bigger legal threat. Now, even though the settlement money seems to cover what was claimed and acknowledged to be owed to artists, UMG is using the guise of a copyright claim to recover the money from its insurer.

One might ask if record labels should just stop handing over royalties to artists altogether and let insurers pick up the tab after the inevitable copyright infringement claims come. Is UMG trying to pull an "exploit now, pay later, murder the insurer" scheme? The company didn't respond to requests for comment.